The Economics of tyres

The basic of Economics states that demand should equate supply to maintain price stability, and any deviation from this principle creates imbalances resulting in price instability.

Case of OTR tyres
Take the case of Off The Road (OTR) tyres used primarily for mining and other industrial uses. Back in the late 80s and early 90s, prices of minerals and raw material were low primarily as a result of poor demand. Mining activities were also minimized since further harvesting of raw material and minerals would put downward pressure on prices. OTR tyre prices then were concomitantly under downward pricing pressure. Many of us would also remember how manufacturers and distributors struggled to profit from manufacturing or distribution of this product category.
 
The reverse of this scenario was true over the past five years when raw material and mineral prices were at its peak, and mining activities were at full momentum. Demand for OTR tyres push prices never witnessed in the past decade. Law of demand and supply came into force and we witnessed the speed existing and new Chinese manufacturers, in a plethora of OTR production. We all know the technically demanding nature of OTR production would mean many of these manufacturers will be short-lived. I could be wrong.

The cyclical demand of raw material and minerals, which is determined by the global economic situation thus also affect the demand of the OTR tyre. A simple fact, but often overlooked.

Currency fluctuations
The value of money, another topic discussed in depth in the study of Economics, is also reflected through the sales and marketing of tyres. The Asia financial crisis in 1997, saw various countries with currencies in a state of imbalance vie-a-vie other currencies. Indonesia had its Rupiah value halved practically overnight to a low of about Rupiah 12,000 per American dollar. Opportunists and we did see many, descended into Indonesia and practically clean out all tyres from Indonesia- selling them into countries with stronger currencies.

We have also seen how the economic situations in the past nearly drove various global manufacturers like Goodyear, Continental, and Dunlop into dire situations. Goodyear in the late 1980s was the target of takeover, Continental was in the doldrums prior to 2000, and Dunlop since being acquired in 1985 by BTR, has been divested. On the contrary, we have seen how these same manufacturers prosper during the recent past few years.

The present economic situation
The present global economic situations will definitely be reshaping the tyre industry. The general questions we could be asking ourselves are perhaps;
a. How will the excesses in China, way beyond local demand, affect the global supply and pricing situations? This question can be further digested, and an analysis of individual product category is required.
b. How will US tyre market, dominating practically a quarter of global tyre demand evolve? Will SUVs and light truck demand really start to diminish, and if so, how will this mutation pen out? Will this mean better and further penetration of Asian car make in US, and if so, what are the new preferred car models since it affects tyre size mix?
c. What will become of American tyre plants which have skewed production to SUVs and light truck? What is the cost of transforming existing plant structures from producing SUVs and light truck to producing more passenger or even commercial tyres?
d. How will the definite drop in global new automobile demand over the next few years affect tyres required for OEM? Will the excess created by this drop in OEM tyre demand further place more excesses into the replacement tyre market?
e. What will happen to consumer demand over the next two to three years, when economic situations are expected to be at its worst? What will happen to retailers and distributors, particularly the large ones, who have geared themselves to the good times two to three years back?
 
The understanding of tyre, be it product, category, or companies, is so much intertwined with basic understanding of Economics. The next couple of years will be trying times, and in my opinion will create another round of shake up at least equivalent to the last round of upheavals a decade or so ago.

This is article 3 by Ler Hwee Tiong, Managing Director at Tyrepac Pte Ltd in his 7 part-series on Selling and marketing tyres- How difficult can that be?